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Due Diligence: Vetting and Evaluating Organizations CHAPTER 8 Due Diligence: Vetting and Evaluating Organizations 133 nce you have compiled a list of potential organizations to O fund, you’ll want to conduct a due diligence process to vet them for effectiveness. Due diligence involves assessing a nonprofit’s goals, strategies, and capabilities to determine whether the organization is worth your support. This chapter addresses two essential questions: • What is due diligence, and why does it matter to my philanthropy? • How do I conduct the due diligence process—what tools and resources should I use? Due Diligence: Essential Questions Due diligence covers six basic areas:32 Legal Compliance: Is the organization in compliance with tax and other regulations? Goals: What does the organization aim to accomplish? Strategies: What are the organization’s strategies, i.e., its “theory of change,” for reaching its goals? Capabilities: What are its capabilities for implementing these strategies in terms of leadership and human resources, financial capability, and transparency? Diversity, Equity, and Inclusion: How well does the organization meet your DEI criteria? Monitoring, Learning, and Evaluation: How does the organization know if it is making progress? 134 / CHAPTER 8: DUE DILIGENCE: VETTING AND EVALUATING ORGANIZATIONS We hope this chapter will help you figure out what’s important to know, where to find it, and how to decide whether you have sufficient information to feel comfortable funding an organization. How to Conduct Due Diligence Here are the general methods we recommend for finding answers to these questions: • Search for material available online—from the organization itself or from third parties. • Talk to people you know who have contributed to or worked with the organization. • Ask the organization for materials that are not available online. • If you are prepared to make a significant gift if the information is positive, meet with the nonprofit’s leaders.33 We touched on some of these topics in the preceding chapter. The main source of information about a nonprofit comes from the organization itself. The contents of its website should provide answers to most of the questions above. To avoid creating unintended expectations or imposing an undue burden on the organization, we suggest postponing direct contact with its staff until you’re pretty likely to make a gift. In Chapter 3: Learning About Philanthropy With and From Others, we introduced the Philanthropist Resource Directory, which lists different types of donor support organizations. Individuals who join education providers or peer networks may have access to staffed support on activities such as due diligence and vetting. In some instances, community foundations can take the lead in performing due diligence. 135 / CHAPTER 8: DUE DILIGENCE: VETTING AND EVALUATING ORGANIZATIONS Charity Evaluation Websites Although the primary source of information about an organization is its own website, it is usually valuable to look to third-party sources as well. Several independent websites provide information about nonprofit organizations. GuideStar publishes both an organization’s Form 990 tax return and information provided by the organization, including, at times, information that depicts its impact; GiveWell and ImpactMatters provide impact evaluations; and Charity Navigator provides information about an organization’s finances and transparency. GuideStar (guidestar.org) aggregates information about the 2.7 million nonprofits registered as 501(c)(3) organizations in the United States. In addition to publishing their Form 990 tax returns, it categorizes organizations into levels from bronze to platinum on the basis of the amount of information they self-report. A gold level distinction from GuideStar means that the organization has provided a sufficient amount of information to answer the “Charting Impact” questions, which include most of the Essential Due Diligence Questions listed above. To reach the “platinum” distinction, nonprofits must also provide at least one sample metric used for evaluation. Most of GuideStar’s information is free, but you can access more detailed data for a monthly fee. CAUTION! Other than an organization’s 990, GuideStar does not vet an organization’s data but only provides a platform on which it can share information about its work—so be cautious when reviewing the organization’s answers to the Charting Impact questions and responses to the Platinum-level data. GuideStar’s Charting Impact Questions 1. What is your organization aiming to accomplish? 2. What are your strategies for making this happen? 3. What are your capabilities for making it happen? 4. How will you know if you are making progress? 5. What have and haven’t you accomplished so far? learn.guidestar.org/hubfs/Charting%20Impact%20Small%20Group%20 Handout%202018.pdf 136 / CHAPTER 8: DUE DILIGENCE: VETTING AND EVALUATING ORGANIZATIONS GuideStar relies significantly on organizations’ tax returns. Check to see that they’re recent. • GiveWell (givewell.org), which is aligned with the Effective Altruism movement, identifies the most cost-effective organizations addressing health and other problems among vulnerable populations in the Global South. Its reviews are based on third-party evaluations of impact as well as an organization’s transparency and its ability to absorb more funding. In addition to analyzing the evidence base for interventions, GiveWell compares organizations using metrics such as “cost per life saved.” GiveWell recommends specific nonprofits for donors to fund. For example, it recommends the Malaria Consortium as a top charity, having reviewed its seasonal malaria chemoprevention (SMC) program and estimated that “the total cost to achieve the equivalent of four person-months of SMC coverage is $6.93.”34 GiveWell’s analysis of the SMC program found that it has a strong evidence base, high cost effectiveness, a good track record of implementation, and room for more funding to scale up its activities.35 GiveWell sets a high bar for the evidence needed to assess an organization. As of June 2019, it published reviews of only eight “top charities” and eight “standout charities. • ImpactMatters (impactm.org) rates the impact of direct service organizations that are focused on health, anti-poverty, education, and similar outcomes.36 It uses a star rating system (one to five stars) based on its estimates of the cost-effectiveness of the nonprofit’s programs and an analysis of its financial health and impact transparency. Like GiveWell, ImpactMatters bases its reviews on the outcomes of evaluation studies, but it does not have as high a bar and plans to release over 1,000 reviews in the coming months. 137 / CHAPTER 8: DUE DILIGENCE: VETTING AND EVALUATING ORGANIZATIONS • Charity Navigator (charitynavigator.org) rates 9,000-plus US-based nonprofits that have revenues over $1 million and provides data on another 1.8 million nonprofits in the US. It allows donors to search by an organization’s name or category of focus. Charity Navigator’s ratings focus on financial health, accountability, and transparency and are based primarily on information provided on an organization’s Form 990 and website.37 CAUTION! Charity Navigator does not answer many of the questions necessary for due diligence, and it uses overhead costs as a proxy for effectiveness, which is highly misleading (for more informtation on the importance of overhead costs, see Chapter 10: Making Gifts). A four-star rating from Charity Navigator alone is not enough to signal that an organization is worthy of your support. Like GuideStar, Charity Navigator relies significantly on organizations’ tax re- turns. Be sure that they’re recent. Grantees of Respected Foundations Another way to vet organizations is to look at the grantees of respected foundations in your focus areas. You often can search the websites of larger foundations for an up-to-date list of the organizations they support. For example, the Gates Foundation has a comprehensive database of grants, which is searchable by name, topic, year, program, and award amount.38 The Ford Foundation has a similar searchable grants database.39 You can find foundations in your focus areas through Internet searches or through (paid) access to the online directory of foundations40 run by Foundation Center (now Candid). 138 / CHAPTER 8: DUE DILIGENCE: VETTING AND EVALUATING ORGANIZATIONS Core Due Diligence Questions, Illustrated by Application to an Actual Organization In this section, we will walk you through applying the due diligence questions to an actual organization: D.C. Central Kitchen. Is the Organization in Compliance With Legal Regulations? WHY IS THIS IMPORTANT? A positive answer to this question will help ensure that the organization is not a scam or a front for terrorist or other illegal activities. If you wish to claim a tax deduction for your gift, you should check that the organization has 501(c)(3) tax status under the Internal Revenue Code.41 WHAT TO LOOK FOR AND WHERE TO FIND IT: • Use GuideStar or Charity Navigator to confirm that the organization is a registered 501(c)(3) nonprofit. Alternatively, you can check the IRS website directly.42 • If you are concerned that the organization might be connected with terrorist or other illicit activities, see the US Department of the Treasury’s list43 and the Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons list (“SDN List”).44 • Nonprofits that are agents of activities for foreign entities or perform activities for them must
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